JACKSONVILLE, Fla., Aug. 9 /PRNewswire-FirstCall/ -- Sunset
Financial Resources, Inc. (NYSE:SFO), a specialty finance REIT,
today provided an update on its asset redeployment efforts and
announced its financial results for three months ended June 30,
2006. The three months ended June 30, 2006, represent the first
quarter of Sunset's operations during which the external management
agreement with Cohen Brothers Management, LLC has been in effect.
Although the agreement has only been in place since April 27, 2006,
Sunset has made substantial progress to date in executing its asset
redeployment. As part of the redeployment, Sunset has been exiting
its existing investments in residential mortgage securities and
reinvesting its capital into its new targeted asset classes,
including collateralized debt obligations and collateralized loan
obligations, which are collateralized by residential
mortgage-backed securities, commercial mortgage-backed securities,
subordinated debt financings primarily in the form of trust
preferred securities issued by banks and insurance companies and
leveraged loans. Through August 9, 2006, Sunset has redeployed
capital of $61.8 million into new target asset classes, which are
expected to yield a 10%-14% return on equity. To generate the net
capital needed to invest in the new asset classes, Sunset has sold
three blocks of its residential mortgage securities, repaid the
related repurchase agreements and terminated interest rate swap
agreements. Two of these transactions occurred during the second
quarter and one occurred during July 2006. In the two transactions
completed in the second quarter, Sunset: * Sold mortgage backed
securities with a fair value of $358.4 million; * Paid off related
reverse repurchase agreements of approximately $342.0 million; *
Terminated interest rate swaps in a gain position for cash proceeds
of $9.6 million; and * Recognized a net gain of $919,000 on the
transaction, consisting of a loss on the sale of securities of $8.7
million and a gain on the interest rate swaps of $9.6 million. For
the transaction completed in July, Sunset: * Sold mortgage backed
securities with a fair value of $450.7 million; * Paid off reverse
repurchase agreements totaling $433.3 million; and * Terminated
interest rate swaps in a gain position for cash proceeds of $8.9
million. * Economically, the July transaction resulted in a net
loss of $4.6 million, comprised of a $13.5 million loss on sale of
the securities, offset in part by an $8.9 million gain on the
termination of swaps. However, for financial reporting purposes,
the $13.5 million loss on the securities sale was reflected as an
impairment charge on the income statement for the quarter ended
June 30, 2006. The gain on the termination of the swaps in July
will be reflected in the third quarter income statement. In both
the second quarter and the July transactions, the losses realized
on the sales of securities and the gains realized on the
termination of the swaps reflect the cumulative mark-to-market
adjustments on these assets over time, which were previously
reflected in other comprehensive income. Upon the sales (or
identification for sale) and termination transactions, however,
these mark-to-market adjustments were, or will be, reclassified out
of other comprehensive income (balance sheet) and onto the income
statement. Commenting on the disposition activity, Stacy M. Riffe,
Chief Executive Officer and Chief Financial Officer of Sunset
Financial Resources, said, "We have made considerable progress in
our asset redeployment. And when you look at the transactions in
total, we accomplished exactly what we set out to do, namely to
systematically sell assets and terminate hedges so as not to incur
losses in excess of the mark-to-market adjustments that we had
already recorded on these assets through other comprehensive
income. The combination of asset sales and swap terminations from
May through July resulted in a net realized loss of $3.7 million.
This net amount does not constitute an additional loss on these
assets; it is simply a reclassification of an unrealized loss in
OCI to a realized loss on the income statement." Continuing, Ms.
Riffe added, "In interpreting our second quarter performance, it is
important to realize that the results include a timing difference
in regards to our gain and loss recognition on our July asset
sales. At June 30, we realized an impairment loss on the securities
we sold in July. GAAP requires us to recognize the loss on these
securities in the second quarter since, due to their impending
sale, we would not be able to recover the mark-to-market loss on
these securities. The gain on the interest rate swaps terminated in
July was substantially recorded within OCI in the current quarter,
and will be recognized in earnings in the third quarter upon
realization of this gain. As a result of these GAAP requirements,
the second quarter results include the loss associated with the
sale of the securities in July but not the corresponding gain on
the interest rate hedges terminated." For the second quarter of
2006, Sunset reported a net loss of ($13.2 million), or ($1.26) per
diluted share, compared to a net loss of ($5.1 million), or ($0.49)
per diluted share, in the same period a year ago. Included in the
net loss of ($13.2) million were: * An $8.7 million loss on the
sale of securities in the second quarter; * A $13.5 million
impairment charge on the securities sold in July; * A $9.6 million
gain on the interest rate swaps terminated in the second quarter;
and * A $1.3 million charge for merger related expenses. Net
interest income in the second quarter was $2.5 million, compared to
$2.8 million in the same quarter of 2005. For the second quarter,
the yield on average earning assets increased to 4.93%, compared to
4.25% in the same period last year. The cost of interest bearing
liabilities, net of the positive contribution of interest rate
hedges, during the second quarter was 4.03%, compared to 3.58% in
the period ended June 30, 2005. This resulted in a continued
improvement in our net interest spread of 90 basis points during
the second quarter, compared to 67 basis points in the same period
last year. Included in operating expenses for the quarter were
approximately $1.3 million in transaction-related expenses. These
included legal costs directly related to the merger and legal costs
related to stockholder activist activities, as well as audit, tax
and banking fees related to merger activities. While Sunset is the
legal entity that will survive the merger with Alesco, under
accounting literature for business combinations, Sunset is
considered the entity being acquired for accounting purposes.
Therefore, transaction-related expenses must be expensed as
incurred. As of June 30, 2006, Sunset's net assets (total assets
less total liabilities) were $108.6 million versus $109.7 million a
year ago and $109.6 million at March 31, 2006. Total assets at June
30, 2006, were $731.4 million, and were comprised of residential
mortgage-related assets, commercial bridge loans, warehouse
deposits and the preferred equity of an entity that issues loan
obligations. At June 30, 2006 Sunset Financial had a GAAP book
value of $10.33 per share. As a reminder, the book value per share
is calculated by dividing the stockholders equity as of June 30,
2006, by the number of shares outstanding and includes the value of
securitized loans at their historical cost of $149.3 million. As of
June 30, the fair value of the securitized loans was $141.9
million. On April 27, 2006, Sunset Financial announced a definitive
merger agreement with Alesco Financial Trust and entered an
external management agreement with Cohen Brothers Management, LLC.
The combined company will continue to trade on the NYSE and will
operate under the Alesco Financial name. The merged company will
pursue Alesco's investment strategy focused on trust preferred
securities issued by banks and insurance companies, middle market
loans and residential mortgage backed securities. On July 20, 2006,
Sunset and Alesco announced a revision to the merger agreement to
include the addition of a special merger dividend of $0.50 per
share to Sunset stockholders. Ms. Riffe concluded, "Overall, it was
a very active quarter. We made considerable progress in our asset
redeployment. Once we are fully invested in the asset classes
consistent with the new investment strategy, we anticipate the
return on equity on the redeployed capital to be approximately
10-14%. In addition to the asset redeployment, we continued to make
progress on our merger preparation to ensure a seamless and smooth
integration of the two companies. We remain committed to completing
the proposed merger with Alesco and continue to believe this
transaction serves the long-term interests of our stockholders."
Sunset Financial has scheduled a conference call to discuss its
second quarter results at 10:00 a.m. ET on Thursday, August 10,
2006. A live webcast of the conference call will be available
online at http://www.sunsetfinancial.net/. Web participants are
encouraged to go to the Web site at least 15 minutes prior to the
start of the call to register, download, and install any necessary
audio software. Those without web access should access the call
telephonically at least ten minutes prior to the conference call.
The dial-in number is (866) 543-6407 and the participant code is
43207822. An archive of the webcast will be available online from
August 10, 2006 through September 10, 2006 at
http://www.sunsetfinancial.net/. In addition, a dial-in replay of
the call will be available from August 10 - August 17, 2006. The
replay dial-in number is (888) 286-8010. The passcode is 17145493.
About Sunset Financial Resources, Inc. Sunset is a specialty
finance REIT headquartered in Jacksonville, Florida and trades on
the New York Stock Exchange under the symbol "SFO." About Cohen
Brothers Management, LLC Cohen Brothers is a leading asset
management firm with approximately $22 billion in assets under
management, including nearly $8 billion in trust preferred
securities. Based in Philadelphia, PA, the company has over 70
professionals in offices in Philadelphia, New York City, and Paris.
Cohen Brothers is a market leader in trust preferred securities
origination for bank and insurance companies with a 35% market
share in 2005. The company has managed 21 CDO and CLO transactions
since 2002 and was ranked as the second largest manager of
aggregate CDO assets under management for 2002-2005, according to
Asset-Backed Alert, an industry publication. About Alesco Financial
Trust Alesco is a specialty finance REIT headquartered in
Philadelphia, Pennsylvania. The company is externally managed by an
affiliate of Cohen Brothers. Alesco invests primarily in trust
preferred securities issued by banks and insurance companies,
middle market loans and residential mortgage backed securities. As
of June 30, 2006, Alesco had approximately $3.1 billion in assets.
Certain statements in this news release may constitute
"forward-looking statements" within the meaning of the federal
securities laws and involve risks, uncertainties and other factors,
which may cause the actual performance of Sunset Financial
Resources, Inc. to be materially different from the performance
expressed or implied by such statements. These risks include the
failure of the Company to successfully execute its business plan,
gain access to additional financing, the availability of additional
loan portfolios for future acquisition, continued qualification as
a REIT, the cost of capital, as well as the additional risks and
uncertainties detailed in the Company's periodic reports and
registration statements filed with the Securities and Exchange
Commission. Sunset has filed a preliminary proxy
statement/prospectus with the Securities and Exchange Commission
and will file a final proxy statement/prospectus and a tender offer
statement on Schedule TO with the SEC. Investors are urged to read
the proxy statement/prospectus and the tender offer statement
(including an offer to purchase and related documents) when they
become available because they will contain important information.
These materials will be available free of charge at the SEC's
website, http://www.sec.gov/, or by directing a request to .
Sunset, its directors, and its executive officers may be considered
participants in the solicitation of proxies in connection with the
proposed transactions. Information about the directors and
executive officers of Sunset and their ownership of Sunset stock is
set forth in the 2005 Annual Report on Form 10-K. Investors may
obtain additional information regarding the interests of such
participants by reading the proxy statement/prospectus for the
proposed merger when it becomes available. Contact: Stacy M. Riffe
Jeffrey Goldberger / Garth Russell Chief Executive Officer KCSA
Worldwide (904) 425-4365 (212) 896-1249 / (212) 896-1250 / Sunset
Financial Resources, Inc. Consolidated Balance Sheets (in
thousands, except share data) June 30, December 31, 2006 2005
(unaudited) Assets Mortgage assets Mortgage backed securities,
available for sale $468,238 $942,900 Securitized hybrid adjustable
rate mortgages 149,321 160,602 Commercial mortgages 17,503 29,347
Total mortgage assets 635,062 1,132,849 Allowance for loan losses
(6,085) (7,321) Net mortgage assets 628,977 1,125,528 Debt
securities, available for sale 49,999 - Cash and cash equivalents
31,065 17,570 Warehouse deposits 4,500 - Interest receivable 2,743
4,542 Fixed assets, net 361 521 Other assets 1,586 1,853 Interest
rate swap agreements 12,197 12,246 Total assets $731,428 $1,162,260
Liabilities Reverse repurchase agreements $565,292 $1,031,831
Junior subordinated notes due to Sunset Financial Statutory Trust I
20,619 20,619 Trust preferred obligations 35,000 - Interest rate
swap agreements - 137 Accrued liabilities 1,954 2,676 Total
liabilities 622,865 1,055,263 Commitments and contingencies
Stockholders' equity Preferred stock, $.001 par value, authorized
50,000,000; no shares outstanding - - Common stock, $.001 par
value, authorized 100,000,000; 10,516,100 and 10,516,600
outstanding at June 30, 2006 and December 31, 2005, respectively 11
11 Additional paid in capital 119,455 119,391 Accumulated other
comprehensive income (loss) 11,404 (2,998) Accumulated deficit
(22,307) (9,407) Total stockholders' equity 108,563 106,997 Total
liabilities and stockholders' equity $731,428 $1,162,260 Sunset
Financial Resources, Inc. Unaudited Consolidated Statements of
Operations (in thousands, except per share data) Three Months Ended
Six Months Ended June 30, June 30, 2006 2005 2006 2005 Interest and
fee income $11,433 $11,802 $24,405 $21,973 Interest expense (8,967)
(9,031) (18,728) (15,730) Net interest income 2,466 2,771 5,677
6,243 Provision for loan losses (70) 5,722 (74) 5,798 Net interest
income after provision 2,536 (2,951) 5,751 445 Net gain (loss) on
sales of securities (8,697) 8 (8,697) 8 Net gain on termination of
interest rate swaps 9,616 -- 9,525 -- Impairment losses on
mortgage-backed securities (13,518) -- (13,518) -- Operating
expenses Salaries and employee benefits 663 564 1,195 1,304
Professional fees 1,603 756 2,525 1,220 External manager fees 234
-- 234 -- Other 684 830 1,376 1,579 Total operating expenses 3,184
2,150 5,330 4,103 Net loss $(13,247) $(5,093) $(12,269) $(3,650)
Basic and diluted loss per share $(1.26) $(0.49) $(1.17) $(0.35)
Weighted average basic and diluted shares 10,481 10,475 10,478
10,465 DATASOURCE: Sunset Financial Resources, Inc. CONTACT: Stacy
M. Riffe, Chief Executive Officer of Sunset Financial Resources,
Inc., +1-904-425-4365, ; or Jeffrey Goldberger, +1-212-896-1249, ,
or Garth Russell, +1-212-896-1250, , both of KCSA Worldwide for
Sunset Financial Resources, Inc.
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